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Following is the speech delivered by the Chief Executive, Mr Tung Chee Hwa, at "Leader of the Year" Gala Dinner tonight (Tuesday):

Patrick, Charles, Lawrence, distinguished guests, ladies and gentlemen,

Good evening, thank you for being here tonight. And thank you, Sing Tao for hosting this event. I also wish to thank the Panel of Judges for conferring this Leadership Award on me. I will accept this award on behalf of all of the people of Hong Kong who together, over the last two and half years, had been able to successfully turn the concept of "One Country, Two Systems" into reality and to successfully overcome the challenge posed by the Asian Financial Turmoil. Thank you all for making Hong Kong into such a successful and exciting place. May I say that I am also delighted to be associated with a "Young Leader of the Year". Congratulations, Mr. Wong!

Tonight, I do not want to walk in front of you, I just want to walk beside you, as I share with you a message. It is a message of fortune. It is about the advent of the knowledge economy, and how and why every social group in Hong Kong will have a good share in it, especially the middle class. Let me begin.

Throughout the eighties and a good part of the nineties, while we were preparing for our return to the motherland, some important things were happening around us. It was the silent but rapid march of science and technology. We were not quite aware of it. Even most people in the United States were unaware of it. Vice-president Al Gore talked about building an information super-highway in 1992. But he soon dropped the subject - the highway was already there and it was the internet. Then futuristic terms such as "genome project", "cloning", "GM food" and the like began to slip into our everyday language. And suddenly, the knowledge economy is upon us in full force, catching us less than one hundred percent prepared.

In fact, many people still do not fully know what the knowledge economy is or what it implies. But some of us knew that rapid changes were in the wind. We were fortunate that two years ago, we were able to appoint Professor Tien Chang-lin to chair our Commission on Innovation and Technology. It is hard to find a more well qualified person to inform us in Hong Kong on the subject. Professor Tien is a first-rate scientist, engineer and for many years leader of arguably one of the world's finest institutions of higher learning, the University of California at Berkeley, located right next to Silicon Valley, one of the world's most formidable centres of innovation and technology. Now we have a good idea of what the knowledge economy is. We also know what dire consequences will be in store for us, if we fail to respond to its challenges and exploit its opportunities.

We all learned when we were school kids what the British philosopher Francis Bacon had said: "Knowledge is power." But that was four hundred years ago. The knowledge economy as we know it today is not just about knowledge but a happy combination of three factors:

- An explosion of new knowledge coming from the great laboratories and research centres built by governments, universities and corporations;

- Open and efficient markets in a growing number of countries, big and small, ready to commercialize the new knowledge to create valuable products and services;

- The coming into maturity of information technology, that is, computer science and communications technology, which makes it possible to process the tremendous volume of new scientific and market knowledge, and to diffuse it quickly to potential users worldwide.

All this is perhaps well known. What is remarkable is the element of speed in each of these three factors. It's not just knowledge but an explosion of knowledge, coming thick and fast. Not just markets, but efficient markets. Not just diffusion of information but quick, in fact, lightning quick, diffusion of knowledge. Indeed, how quick? Let me quote you three empirical laws to give you some idea:

- Moore's Law: the maximum processing power of a microchip at a given price doubles every 18 months;

- Gilder's Law: the total bandwidth of communication systems triples every 12 months;

- Metcalfe's Law: the rate of increase of the value of a network, such as an international marketing system or a phone system, is proportional to the number of nodes in the network.

So we are talking about exponential growth. We have very good reasons to believe that the knowledge economies are about to climb onto the vertical arm of their exponential growth paths and blast away.

The challenge is whether we will be left behind. The opportunity, on the other hand, is that we can ride on that blast too. If you feel a bit scared then let me tell you it's alright. It is the kind of feeling when you see a treasure trove ahead but don't know if you can get there in time before someone else does. So we must all hurry!

Wait a minute, you might say, why do we have to take this dizzying route? Can't we be more laid back and do the old things that we are comfortable with? Well, my friend, I must tell you that the world has changed and the good old days are all but running out. While everyone else is putting in hard work to boost real productivity with high-tech, new knowledge and original ideas, do you think we can still rely on capital asset inflation for prosperity and wealth creation? Do you think in an open economy like ours, where we have to compete with other cities in Asia, we can survive the competition? The answer is a resounding no. Indeed, knowledge economy supported by innovation and technology is the only route.

We are not an economy which is rich in natural resources. The only way we can lift ourselves up is to boost our innovative human capital. Now, let me point out that the way forward is not impossibly hard. We actually are quite well prepared for it. We do have open and highly efficient markets in Hong Kong. Our IT infrastructure, although not the most advanced in the world, is already among the best. So we already have a combination of two things. We just need to strengthen our culture of innovation and technology. We would then be well on our way.

We should also remember that knowledge economy does not only improve our economic well being, it will also help to enhance our quality of life. Through better use of IT in the workplace and in our homes, we can relieve ourselves of many of the mundane and repetitive tasks, so that everyone of us will have more time to spend with the family, do things we like and undertake activities to pursue our personal achievements.

I also want to tell you something very important today. In this race into the knowledge economy, one particular social class will benefit most relative to the rest, and that class is the middle class. This may sound unfair. But for a class that is just emerging from the Asian Financial Turmoil scarred all over with negative equity, shrunken paychecks and perhaps even a pink slip or two, and all the while paying income taxes relentlessly and not getting much government help, this is certainly a timely turn of fortune. Now why do I say it will be the middle class? So far the most successful dotcom companies in Hong Kong are not started by members of the middle class.

But in the most advanced knowledge economy of the world, the United States, there is one clear fact that reminds us that : most of the Top Ten US corporations 30 years ago, including big names like General Motors, Eastman Kodak, etc., were not even on the Top Twenty-five list last year. Indeed, some other large blue-chip manufacturing and service companies who have not made a quick and successful transition into the knowledge economy are in danger of becoming dinosaurs. On the other hand, most of the newly minted millionaires and billionaires are scions of the middle class!

What is the reason for that? Very simple. We are talking about a knowledge economy, in which knowledge, brain power, or innovative human capital, is worth more than physical or financial capital. The middle class does not have much physical or financial capital. But because of the value it has traditionally put on hard work and education, its members, especially the offspring of its older members, are extremely rich in human capital. They are, and will be, the engineers, the research scientists, the professors, the innovative art designers, the managers, the professionals, in short, the knowledge workers. Collectively, they are the group most at home with innovation and technology. As we move deeper into the knowledge economy, the entire middle class will move up in both relative and absolute terms. Mostly, it is their game!

Moreover, one interesting phenomenon that has happened in the US will likely happen in Hong Kong. That is the rise of the employee-entrepreneurs in many of the start-up companies. Unlike traditional employees, who are paid cash, this new breed of employees are paid stock options in ever higher proportions. Working for a company, they become part-owners of it. And who are they?

They are the knowledge workers, mostly the middle class or the sons and daughters of the middle class. This is a new and significant kind of social mobility, found only in the knowledge economy. While the whole middle class will greatly benefit in this economy, some, if they are more hard-working, or more intelligent, or more willing and capable to take risks, will be rewarded even more richly with company ownership. Many of them will eventually rise to the top.

In more traditional economies, setting up your own technology-intensive companies are difficult because of the high entry barriers in the form of physical and financial capital requirements. In the knowledge economy, such barriers have been cut to the minimum, and even that is taken care of by venture capitalists. To launch a successful new business, all one needs is a great innovative idea carefully worked out. And the knowledge workers are best at doing that! Moreover, the big guys cannot stop the small guys from entering the game, because they do not have the monopoly on great ideas. In fact, giants like Microsoft cannot be what they are without the small guys coming up with big ideas that help them grow even bigger. If the US is any guide, the big guys in Hong Kong will need many of the small guys as well. We will have our own big and little Bill Gates. Indeed, Hong Kong has always provided upward social mobility for the well motivated. We have always been famous for our entrepreneurial culture. In the new context of a knowledge economy, there will be many more avenues to success.

Who can be a knowledge worker? You don't need to be a rocket scientist to be a knowledge worker. Anyone with a post-secondary education can be a knowledge worker. Anyone who have finished high school, or anyone who is literate, numerate, creative, entrepreneurial, with a period of proper training, can possibly become a budding knowledge worker also.

But we must acknowledge there will be pressure on those who are left behind. Those without adequate education, those whose skills are outdated, those at an age when acquiring new skills will be difficult, will be disadvantaged. For them the knowledge economy will be a real challenge. The SAR Government will play its part to help. We will provide ample opportunities for those who are determined to improve themselves through learning, training and re-training, and thereby transcend the handicaps imposed by age, family background, the fast pace of technological change or an earlier lack of motivation. The "Lifelong Learning" concept espoused by the Education Commission will be a most important step. As we go along, we will find more ways to help those without the necessary skills to get equipped and move ahead.

Let me make this promise: no one who is willing to work hard to move up will be denied a fair chance. Those who are deserving will not be left behind. They should not despair.

For those who are truly left behind, what are their prospects in a knowledge economy? How will these people fare? Not as dim as expected. Again, if we use the most advanced knowledge economy in the world as an example, we see interesting trends. Throughout the seventies and into the mid-eighties, US income distribution had been worsening for the lowest quartile. Starting from the mid to late eighties and throughout the nineties, real income growth of the lowest quartile has been mostly positive. In fact, the growth is often just about as fast or sometimes faster than those in the top quartile. The exceptions are those in the bottom fifth percentile or lower. But starting from 1990, even those in that bottom rung have seen positive income growth at higher rates than those at the top quartile!

Last fall, new statistics showed a declining overall income inequality in the US economy. This happened at about the same time as the recent productivity pickup became apparent, and "New Paradigm", "Knowledge Economy", "Information Age", etc., became buzzwords. Some may argue that this is not a trend yet and different demographic factors may have been at work. But the new evidence is encouraging.

And not only in the US. In Taiwan, where the economy has embarked on the high-tech path earlier than we did by some twenty years, the income distribution pattern has been benign all along. In fact, wage differentials for both male and female workers narrowed consistently from 1978 to 1998. The sharpest declines in inequalities occurred in the nineties. The much feared social implications of the "digital divide" have so far not materialized. The prospects are good.

Therefore, for those who are left behind can also take heart that the knowledge economy is to your benefit in the long run. Furthermore, your sons and daughters certainly can participate fully in that knowledge economy.

What about the business sector? What are they doing to help move Hong Kong, and their companies, into the knowledge economy? Is this talk about IT, high-tech and knowledge economy just another ploy for more speculative plays by the rich and powerful?

No. Rest reassured. There may be some froth in high-tech stocks everywhere, and perhaps in Hong Kong too. Indeed, investors should be prudent and invest within their means. Certainly, they must understand the activities and the strengths and weaknesses of the companies they are investing in. But underneath the froth many real activities are going on. These companies are providing new investment and employment for the Hong Kong economy. Indeed, if you take a look at the jobs pages in the major newspapers you will find many knowledge worker positions open. No doubt some of our dotcom companies will do better than others. Some will prosper and some will fail. Many of them are paving the way forward to the knowledge economy, for the middle class to rise up, and for those who are trailing to diminish the gap and step up.

On the other hand, we know that there are some companies in Hong Kong, including some bigger ones, that have not integrated IT fully into their management practices. Some haven't even begun to embark on the road to the knowledge economy yet. Many small and medium enterprises, unfortunately, fit these descriptions. In contrast to the dotcoms, they are the notcoms. The bad news for these notcoms is that if they do not move fast to close the IT gap, they are going to fall behind in the knowledge economy in every respect. To all of them I say: Come on, you must not stay on the sideline too long! In Hong Kong, we will become truly and totally successful as a community if all our businesses, big or small, embrace the information technology as the way forward. Only then, will our competitiveness be second to none in Asia.

We in the Government want to give everyone a hand to sign on as we embark on this great journey into the knowledge economy. In particular, we will play our part well in three areas. We will create the best environment to support innovation and technology; we will revamp our school systems and multiply the educational opportunities for everyone; and we will further open up our markets to the benign forces of competition much as we have done in telecom deregulation.

Tonight, we are gathered here to talk about leadership. Yes, the Government will lead. But we are not heading for an elitist society to benefit a few. We are working to usher in the knowledge economy in which everyone will have a good deal.

The middle class, take heart, your future is bright! Businesses big and small, take part! I know some companies still need some gentle prodding to move ahead, and I am giving it!

For those who lack the proper skills or whose skills are going out of date, we'll help you - so gear up and train up, you can make it, and your sons and daughters will make it!

The way ahead is clear for everyone. And I know as a community we have the will to make it happen!

Thank you.

End/Tuesday, February 29, 2000

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